What is a Hybrid Mutual Fund?

A hybrid funds meaning, it is a type of mutual fund that invests in a mix of different asset classes, mainly equities (stocks) and debt (bonds), and sometimes other assets like gold or real estate. The goal is to balance risk and reward by combining the growth potential of equities with the stability of debt, offering investors a diversified and balanced investment option in a single fund.

Types of Hybrid Mutual Funds

Below is an overview of the various types of hybrid funds as classified by the Securities and Exchange Board of India (SEBI):

• Conservative Hybrid Funds:
  These funds invest 10% to 25% in equities and the remaining 75% to 90% in debt instruments. They focus on stability by favouring debt, but also seek growth through limited equity exposure.
• Balanced Hybrid Funds:
  Balanced hybrid funds allocate 40% to 60% each to equities and debt instruments, aiming for moderate growth while managing risk.
• Aggressive Hybrid Funds:
  These funds prioritize growth, investing 65% to 80% in equities, with the remaining 20% to 35% in debt to add stability.
• Dynamic Asset Allocation (Balanced Advantage) Funds:
  These funds take a flexible approach, adjusting their mix of equity and debt from 0% to 100% based on market conditions to optimize returns.
• Multi-Asset Allocation Funds:
  These funds spread investments across at least three asset classes, with a minimum of 10% in each, aiming to stabilize the portfolio and reduce risk by diversifying.
• Arbitrage Funds:
  With at least 65% invested in equities, these funds use arbitrage strategies to profit from price differences in the market by simultaneously buying and selling securities.
• Equity Savings Funds:
  These combine equities, debt, and derivatives, maintaining at least 65% in equities (including Arbitrage positions) and 10% in debt. They generate returns through cash-futures arbitrage while also participating in equity market growth.

Hybrid Funds Taxation:

The way hybrid funds are taxed depends on their asset allocation. For tax purposes, all mutual funds are classified as either equity funds or debt funds. Hybrid funds fall into one of these categories depending on whether they invest mainly in equities or debt.

• If a hybrid fund primarily invests in equities, it is taxed as an equity fund.
• If it mainly invests in debt instruments, it is taxed as a debt fund.

1. Equity-Oriented Hybrid Funds (≥65% Equity)

• Definition: Funds with at least 65% in domestic equities (e.g., aggressive hybrid, equity savings).
• Tax Treatment:
  • Short-Term Capital Gains (STCG): Held for less than 12 months; taxed at 20%.
  • Long-Term Capital Gains (LTCG): Held for 12 months or more; taxed at 12.5% on gains above ₹1.25 lakh per financial year. Gains up to ₹1.25 lakh are exempt each year.
  • No indexation benefit is available.
• Dividends: Taxed at the investor’s slab rate.

2. Debt-Oriented Hybrid Funds (<65% Equity)

• Definition: Funds with less than 65% in domestic equities (e.g., conservative hybrid, some balanced hybrid).
• Tax Treatment (as per new rules from April 1, 2023):
  • All Capital Gains (STCG and LTCG): Taxed as per the investor’s income tax slab, regardless of holding period.
  • Investments before April 1, 2023: If held for more than 24 months, LTCG at 12.5% applies, but only to those legacy investments.
• Dividends: Added to income and taxed as per slab.

3. Hybrid Funds With 35–65% Equity (Balanced Hybrid Category)

• Tax Treatment:
  • If held for less than 24 months: gains taxed as per income tax slab.
  • If held for more than 24 months: gains taxed at 12.5% (for investments made before April 1, 2023); new investments taxed at slab rates.

Taxation Summary for Hybrid Funds (FY 2025–26)

Fund Type	Equity Exposure	STCG Tax	LTCG Tax	Tax-Free Limit
Equity-Oriented Hybrid (≥65% equity)	≥65%	20% (<12 months)	12.5% (>12 months)	₹1.25 lakh per year
Debt-Oriented Hybrid (<65% equity)	<65%	As per slab	As per slab	None
Balanced Hybrid/Other (35%-65%, legacy)	35%–65% (pre-2023)	As per slab	12.5% (>24m, pre-Apr 2023 buy)

Conclusion

Hybrid funds offer flexibility to suit a variety of financial goals and risk preferences due to their diversified asset allocation. However, their tax treatment depends on their portfolio composition, which can have a significant impact on your net returns. It’s important to be aware of these tax implications when planning your investments.

Regards,

Honvest Team.